Malaysia has to loosen the reins and give asset managers greater freedom and flexibility to invest abroad in order for the country to become a global provider of Islamic wealth management services, according to local fund managers.

Among other things, local managers need approval from Malaysian regulators, including the central bank, to invest overseas, primarily because it will involve converting large sums of ringgit into foreign currency.

And their lack of a global track record puts them at a disadvantage when it comes to selling shariah-compliant funds abroad and securing investment mandates from the deep-pocketed Middle Eastern countries that make up the Gulf Cooperation Council (GCC).

"The flows must be both ways. For as much as we can attract the money to come here, we should also allow the funds here to go abroad to seek better returns," Mr. Taufiq says in an interview with Asia Asset Management (AAM).

Although Malaysia has established itself as a major player in Islamic bonds and shariah investments, he says the country’s Islamic investment market is still only a small sub-set of the Asian asset management industry.

He points out that Malaysia’s capital market is only around 3.1 trillion ringgit (US$742.43 trillion), with shariah assets accounting for around 60%, or 1.8 trillion ringgit “That's not huge [compared to the Asian asset management industry]," he says.

Malaysian managers who try to sell shariah-compliant funds and investments abroad say they face a number of challenges.

"We have been doing shariah investing for many years, but when we speak to asset owners from the GCC countries, they don't seem to be interested," a Kuala Lumpur-based fund manager tells AAM, speaking on condition of anonymity.

"I think this is partly because the funds are ringgit-denominated. Another reason is that not many home-grown fund management firms have the global investment track record, so that makes the pitch much tougher," he says.

Even if regulators were to liberalise the fund management industry, it may be a while before local asset managers move to take advantage because they are still too focused on domestic opportunities.

"There's still a lot of liquidity in the asset management industry,” another Kuala Lumpur-based fund manager says, noting that the Employees Provident Fund, Malaysia’s largest pension fund, alone has close to 900 billion ringgit of assets.

“So the pie is still big, and local players are more focused in getting a piece of the pie, instead of looking for a bigger pie," he tells AAM, speaking on condition of anonymity.